With supply chains being hit hard by Southern California’s backlog of ships, we might have trouble getting the latest and greatest toys, tech, or jewelry this holiday season. This predicament, coupled with rising inflation, may make it more challenging than ever to spend big on gifts for your loved ones. In this blog post, we will go over 5 financial gifts that don’t cost much now but will have a big financial impact on the recipients in the future.
1. A 529 College Savings Plan
One of the best gifts for kids (and their families) is to help them save for future college expenses by contributing to a 529 College Savings account. The money is invested and grows tax-deferred. When used for college related expenses such as tuition, room and board, computers and books, the funds can be withdrawn tax-free. In addition, funds can be withdrawn for elementary or secondary school tax free up to $10,000 per year. Another great thing about the 529 account is that contributions for a child do not have to be made by the parents. Friends and family members can contribute to the account as well. In some states (not including California), contributions can even get a state income-tax break. Overall, 529 plans provide a way to make a relatively small gift that could grow to be quite large by the time the child uses the money.
2. Life Insurance
One of the most common ways to give the gift of life insurance is to buy a policy for a child. Insuring a child under 18 is an affordable way to lock in lower premium rates and help lock in the child's insurability while they are young and healthy. Depending on the type of life insurance, the policy may offer cash value, which is a portion of the policy that earns interest and may be available to withdraw from or borrow against later down the road. With that in mind, as the insured grows older, he or she would be able to use this source of savings to pay for college, a car, or a down payment on their first home. Keep in mind that you’ll be responsible for making regular premium payments to keep the policy active. Once the child is an adult, you can transfer ownership of the policy to them.
3. Authorized User on Credit Cards
Adding a child to your credit card as an authorized user can help them establish credit history. Your credit history can boost and improve their odds of getting approved for credit later (such as loans and mortgages) and give them a financial edge. I did want to note that some credit card issuers do have a minimum age for authorized users: American Express (13), Discover (15), and US Bank (16). However, issuers from big banks (Bank of America, Chase, Citi, Wells Fargo) do not have a minimum age for authorized users. A great benefit of adding them as an authorized user is that it can help show young adults how to use credit responsibly. Setting limits and keeping accountability when making payments can lay the groundwork for responsible credit management.
4. Contribution to a Roth IRA for Working Kids
If your child is earning income but not yet age 18, you can open a custodial retirement account such as a Traditional IRA or a Roth IRA. As the custodian, you’ll manage all the assets until they turn 18 (or 21 in some states), but all funds belong to them. Opening such accounts will help your child take advantage of the benefits of compounding interest. Roth IRAs typically make the most sense for children because they are usually in a very low tax bracket and the taxes paid now would likely be less than taxes would be if they took future distributions from a Traditional IRA. For parents, you are able to gift the child the money and have them deposit everything themselves while keeping record of the check or transfer. Remember that you can only contribute as much as the child earns each year up to the maximum of $6,000 per year. Also, keep in mind that your child will have to work under an employer who issues a W-2 or 1099 every year for your child to file with the IRS. Unfortunately, "side hustles" such as baby sitting and mowing the lawn for under-the-table income do not officially count as earned income.
5. Make an Appointment with Tori & Alex
Many experiential gifts, like concerts and vacations, might not be possible this year due to the lingering effects of the Covid-19 pandemic. Despite this, you can still give the gift of a meeting with a financial advisor like Tori or Alex. Financial advisors can go over basic money tips, budgeting concepts, and investing strategies for teenagers, young adults, and young professionals to help them get started and build a foundation for financial success in the future.
We hope these 5 gift ideas provide you with some inspiration for your holiday shopping. While we know that financial gifts like those listed above aren't always as exciting in the moment as the newest toy or hottest technology, we believe that these gifts will have an even bigger impact on the lives of your loved ones. They will be thanking you later down the road. To discuss any of these ideas or to meet with financial advisors, Tori and Alex, use the links below.